April 4, 2004, Free Market with Chinese Characteristics
This week's visit to China's People's Daily gives us a mind-blowing lesson in free trade, lamenting that the United States and other major industrial powers may be trying to undermine a previous agreement under which all textile quotas will be eliminated by the end of this year. The fact is, of course, that China's immense textiles industry stands to benefit enormously from the elimination of textile quotas, while politically, other nations, notably the United States, will feel political pressure from their own textile sectors' loss of their remaining protections. I find it mind blowing because China's position on this is 100% right-- and the United States' position is 100% wrong. Period.
Let me make this easy: distortions on trade misallocate resources, and are wrong-- always. While I have heard "infant industries" argued as an exception-- I would accept that for, say, Botswana or East Timor-- NOT for the world's leading industrial power. National security-related restrictions are something else-- and immigration is actually the one area that I think we can and should control for trade purposes-- but that's because its not a distortion better served by subsidies. As to product safety concerns-- domestic products would be subject to the same restrictions-- so fair game.
Going back to trade, we set up a system so that a shirt that China can deliver here for $1 must cost $10 (because that's the cost that American workers can deliver the shirt for). We may preserve a billion dollar industry, but at the cost of making Americans pay, say $5-10 billion more for its products. All because we Americans are too stupid, meanspirited and racist (yes, all three apply) to simply let the products in as cheaply as possible; we would free up that $5-10 billion elsewhere in the economy, and our much more efficient economy could easily generate a billion dollars in dislocation related transfer payments to the WORKERS of the affected industry. But you see, the politics are just too complicated-- easier to make EVERYONE pay too much for products.
Worse, bad trade policy leads to bad foreign policy (duh). Pakistan's Pervez Musharaff was BEGGING President Bush to intercede for textile tariff and quota relief for Pakistan in the aftermath of 9-11-- to shore up his position. Had we done so, we would have had far more leverage with Pakistan on other things (like... delivering... Al Qaeda). But the senators from the Carolinas interceded to protect their politically important constituencies-- and quite literally, the security of the rest of the United States has been undermined to avoid a relatively minor trade concession for an industry scheduled to go "totally free trade" by the end of this year anyway.
Maddening. Unfortunately, it tends to be "my side" that is the worst demagogues on this issue-- because its EASY to see factories close, though when hundreds of thousands of jobs created by having available freed-up capital arrive-- they are spread over everywhere, so no particular Congressman or Senator can take credit for them.
But let me be slightly objective here: the President's jobs record has still been a fucking disaster-- and if asked about it, he will talk about terrorism (the way Senator Kerry might talk about his Vietnam service). BUT-- of the 3,000,000 jobs lost on his watch, economists estimate that only around 10% can be attributed to "outsourcing"-- i.e., functions moved to Bangalore and Rawalpindi. The remaining 90% of job loss is simply from reduced demand-- domestic demand-- for the goods and services, i.e., a recession. Free trade has been a factor-- but a very small factor-- in the net job loss (and indeed, if revised figures are to be believed and 300,000 new jobs created in the last month or two, then its effects have just been wholly offset). The problem with the President's performance has actually been the tax cuts. Not that he cut taxes-- to stimulate economic activity in a recession, cutting taxes is tried and true, as is government spending-- and both have taken place. The PROBLEM is that the tax cuts are (1) back-loaded-- most will not take effect for years, and (2) insanely reverse means-tested to ensure that they are redistributive BUT NOT stimulative, and the government spending has sent lots of money to Iraq and other places where it will not stimulate our economy, or suffers the "reverse means-tested" problem as well.
But other than the pandering shit like the outrageous farm bill, the now reversed steel tariffs and other isolated instances, on trade, this President's record (like those of Presidents Clinton, GHW Bush and Reagan) hasn't been all that bad.
Still, on the whole, it remains ironic when Beijing gets to reeducate us on the virtues of free trade. But there you go...
Comments
You lost me somewhere between the 3 million lost jobs and tax cut problems. Why do you think we lost the jobs and what should Bush have done to stop the bleeding?
Posted by Robin at April 4, 2004 05:24 PM
Robin--
The economy was due for a "correction" after the wild ride of the dot com boom and the unbelievable good luck Bill Clinton enjoyed. So, demand was going to slacken, economic activity was going to slow, jobs would be lost. This was inevitable-- be the President named Bush, Gore, or Nader.
Indeed, its why we usually give the new President a pass for a year or two anyway-- its the prior administration's policies that are still being acted out.
The usual response to a recession (certainly since FDR's day) has been government stimulative activity-- the tools usually being monetary and fiscal policy.
Well, in large part thanks to Alan "irresponsible tax cuts of the worst kind imaginable ARE GOOD" Greenspan, interest rates are effectively below zero-- there's pretty much nowhere to go down from 1%-- though plenty to go up. In short-- we CANNOT stimulate the economy with monetary policy at these levels.
That leaves ONLY fiscal policy-- the combination of government spending and taxation policies. Well, in a recession, deficit spending-- lowering taxes and increasing spending-- are the usual tactics. We have the so-called "multiplier effect"-- each dollar of spending by the federal government pumpted into the economy generates an additional, $3, 4, 5-- something like that-- in private economic activity. A tax cut works the same way: by putting a dollar back in the hands of consumers who will SPEND it-- THAT will generate another $3, 4 or 5 in other economic activity.
The PROBLEM with the Bush tax cuts then becomes what I said: they are NOT designed to put new money into the hands of people who will spend it (and generate activity) NOW. By insanely cutting things like the taxes on large estates and dividends, money is being redistributed into ALREADY RICH people-- those LEAST LIKELY to spend the additional money and generate economic activity-- and guess what-- that is precisely how it has played out so far.
Also-- as to the new spending, the government spending MOST likely to generate this "multiplier" is quite literally spending that will go to people likeliest to... spend! That would be POOR PEOPLE-- the very people the PResident's policies are CUTTING OFF-- nay, REDUCING spending. Instead, we see spending on large capital projects and pouring money down the shithole of IRaq-- government spending in a recession to be sure-- but like the tax cuts, the least likely to be stimulative of the economy.
Also-- the PResident has done NOTHING-- if not WORSE THAN NOTHING-- on what private employers say is the number one reason they are not hiring: insanely rising health care costs. The Republicans have been in control of the government for his whole term (except for the post-Jeffords era until the mid-terms in the senate-- but Daschle was hardly "opposition"). And his "its malpractice lawyers fault" is as hollow as it sounds-- such costs representing less than 1/2 of 1% of our health care spending.
So-- I blame Bush for (1) squandering an incredible opportunity to shore up a huge problem of American jobs creation with some sort of health care proposal-- while we had the Clinton surplus to do it, (2) wasting the fiscal stimuli of tax cuts and spending increases for the benefit of the already affluent, when they COULD have been used to generate economic activity and jobs. He has been an awful manager of the economy.
When the President's own party is in control of the entire government, if we don't get to blame him for the economy, then when DO we get to blame a president for the economy? (We won't TALK about the environment.)
Posted by the talking dog at April 4, 2004 05:52 PM
Master Robin,
Certainly you should consult the computer in the Batcave before asking Master Wayne (oops!).
Posted by Alfred at April 4, 2004 05:52 PM
I'll have to chew on it awhile Dog. 1 thing's for sure; you know why you think what you do.
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